State aid and the Brexit Trade Agreement: what's new, what's not, and what's next

Alert

04 February 2021

10 min read

State aid remained one of the key sticking points in Brexit negotiations right until the announcement of the Trade and Cooperation Agreement ("TCA") on Christmas Eve 2020. One of the key priorities of the European Union ("EU") during the negotiations was to secure a "level playing field" on State aid, in order to ensure that EU-based companies would not be competing with UK businesses that were in receipt of subsidies that did not conform to the subsidy limitation rules imposed by the EU State aid regime. The UK's concern was its insistence that, post-Brexit, it must not be bound by evolving EU rules, including State aid guidelines, and should not be bound by the jurisprudence of the Court of Justice of the European Union ("CJEU") when it comes to interpreting and applying State aid rules.

The TCA strikes something of a halfway house between these competing priorities: the fundamental rules of EU State aid law will continue to apply in the UK, albeit outside CJEU jurisdiction. There are, however, some fundamental changes to the operation of the UK's new regime.

State aid and the TCA: the key takeaways

The TCA is not a done deal in terms of the UK regime going forward. It will require further implementing legislation by the UK to create the standalone regime envisioned. However, it does set out certain key design features of that regime that underline the key differences and similarities between the existing EU rules and the future UK system.

State aid or subsidy?	"State aid" as a term will be abandoned in the UK going forward, with the TCA focusing on the grant of "Subsidies". However, the definition of a "Subsidy" in the TCA broadly replicates all the key features associated with State aid, i.e., a "Subsidy" means financial assistance from the UK's resources, capable of conferring an economic advantage on the recipient in a manner that could affect trade between the UK and the EU. Interestingly, subsidies are limited to "financial assistance", which has practically always been the case for State aid although not strictly so. The UK, for example, sought clearance for distributing personal protective equipment in September 2020, even though the measure did not involve any financial assistance.¹ Going forward, however, following the end of the transitional period during which the UK was subject to the EU's State aid rules, the UK may not consider such actions as a "Subsidy" covered by the TCA.	✔ Similarity
A principled approach: the future limits on UK subsidies	With respect to determining which Subsidies will be considered not to have a negative effect on UK-EU trade under the TCA, the TCA prescribes six "principles" or criteria that should govern TCA-compliant Subsidy grants. These broadly mirror the assessment criteria that the European Commission ("EC") applies to the assessment of State aid measures, for example, considerations such as proportionality, necessity, incentive effect, etc. One point of difference to note is that the Subsidy must be designed to remedy a market failure or address an "equity rationale". This is analogous to the requirement in EU State aid rules that measures should pursue a Treaty objective, but the TCA wording will give the UK enhanced discretion to identify other equity rationales beyond those contemplated by the Treaty.	✔ Similarity
Ex-ante approval system	The EU State aid regime operates on the principle that, unless an exemption applies, State aid cannot legally be granted until it is formally approved by the EC. This requirement has not been replicated in the TCA, which means that the UK would technically be free to design a regime that does not require prior notification for a Subsidy to be granted.	! Change
Sectoral conditions	Like the EU regime, the TCA contemplates extra conditions for certain sectors. For example, there are extra conditions applicable to Subsidies for banks, credit institutions and insurance companies; rescue and restructuring measures; export subsidies; energy and environment measures; and to air carriers for the operation of certain routes. Notable absences from this list are: airports; railways; maritime transport; research, development and innovation; broadband deployment; public passenger transport by road and rail; and films and audio-visual works. Indeed, audio-visual works, national maritime cabotage, and inland waterways transport all benefit from specific exemptions under the TCA.	✔ Similarity
Sectoral Guidelines	In terms of how the EC assesses whether the conditions applicable to sectoral State aid are met, it has adopted various sets of sectoral guidelines to specify compliance criteria. These are not replicated or referred to in the TCA. They will not, therefore, bind the UK. The UK may of course choose to adopt its own criteria to facilitate assessment of the sectoral conditions if it so chooses, but is not obliged to under the TCA.	! Change
Block exemptions	The TCA does not extend the existing EU block exemptions to the UK. However, the UK has sufficient discretion under the 'principled approach' to introduce its own block exemption-equivalent measures for Subsidies that otherwise meet the six guiding principles once its new regime is introduced.	! Change
De Minimis Exemption	The EU de minimis exemption allows for the grant of up to €200,000 to a single undertaking over three years without the need to notify.² This is effected via a block exemption regulation and so has not made it into the TCA. The TCA does contemplate a general exemption for single grants of up to c.£350,000 to single undertakings over three years in much the same way. This would be the ceiling for any general block exemption that the UK might seek to introduce later, but will not take effect until the appropriate legislation is enacted.	✔ Similarity
Complaints and recovery	EU State aid practice has a well-established complaints procedure, and parties have always had recourse to the CJEU to challenge the EC's State aid decisions. The TCA requires that the UK must put in place an effective mechanism for recovery. The UK is free to design whatever it wishes in this regard, but it appears from the TCA that judicial review will be the main mechanism by which parties affected by the grant of Subsidies to competitors will be able to challenge those decisions. The TCA acknowledges, for example, that the UK's commitments to facilitate effective recovery will require the creation of a new remedy of recovery upon a successful judicial review – indicating this is the means expects recovery actions to be pursued. It remains to be seen if an EU-equivalent complaints procedure will also be introduced. The complaints procedure in the EU cannot lead directly to an order for recovery, but can result in the EC opening an investigation that may lead to such an order. Whether or not the UK will endow the independent body chosen (or created) to administer the UK regime with such powers remains to be seen. This is important because the standard grounds for the launch of a judicial review in the United Kingdom require the applicant to demonstrate illegality, procedural unfairness or irrationality – a much higher standard than that required under the EU complaints procedure. The nature of the system may also impact on the speed of the outcome of any complaint.	! Change
COVID-19 response	In response to COVID-19 the EU created a Temporary Framework for State aid measures that set new, temporary criteria to allow Member States to expedite the grant of State aid to stricken companies. The Temporary Framework did not make it into the TCA, but a new exemption is created for Subsidies granted in response to "national or global economic emergenc[ies]", requiring only that these are "targeted, proportionate and effective" in remedying that emergency. The sectoral conditions will not apply to these Subsidies, although the UK will still need to determine how the "targeted, proportionate and effective" criteria will be applied and assessed. Likely, on an ad hoc basis going forward, however, the UK will be able to invoke the provision for large Subsidy measures even in the absence of more detailed guidance.	! Change

Impact on UK companies

Short-term impact

In the short term, very little will change in practice, although there will certainly be a period of uncertainty whilst the UK regime is still being designed. In the interim, Subsidy-granting authorities (such as local authorities, etc.) are required to assess whether they fall within the definition of a Subsidy under the TCA. That assessment will barely differ from the assessment that they would have had to carry out when granting support that had to be assessed under the EU State aid rules. Subsidy grantors will also be required to assess whether such measures fall within the principles set out in the TCA. For regimes already in place, this exercise will already have been done in the State aid context, and Subsidy grantors will likely continue to refer to EU State aid guidelines to inform their assessments until the UK regime is announced.

What will differ in the short term is the capacity of UK competitors of Subsidy recipients to take complaints to the EC. For the foreseeable future, their only option will be judicial review and it will remain to be seen what credence, if any, the UK courts will give to the jurisprudence of the CJEU in such applications. The TCA affords no role to the CJEU nor its jurisprudence in the new UK regime. In practice, however, given the limited UK jurisprudence on the topic, all of which would have been decided in conformity with CJEU case law, the Courts may well take a pragmatic, referential approach, at least when it comes to interpreting the principles replicated in the TCA.

Longer-term impact

The UK has a lot of key decisions that it will need to take on its approach to the new regime. Detailed consideration will need to be given to potential block exemptions, assessment criteria, and what guidance will be given to Subsidy grantors, particularly in those sectors where conditions are applicable. This will be especially interesting given the anticipated revisions to the various EU State aid guidelines, which will likely see the criteria that Subsidy grantors are used to following in those sectors materially varied. Certainly, the UK will not want to apply more onerous criteria on UK companies than those that may apply to their EU competitors in future.

The UK will also need to designate an independent body to administer the regime. The Competition and Markets Authority ("CMA") is the obvious candidate, and was also the body designated to fulfil that function under the 2019 Brexit deal that was rejected by the UK Parliament. This would represent a substantial new mandate for the CMA, which is already expecting a substantial increase in its merger control and antitrust enforcement workloads as a result of the UK's departure from the Single Market. The government has remained circumspect about which entity will be designated, or created, for the role. Certainly, the Department of Business, Energy and Industrial Strategy ("BEIS") has already been given a prominent part to play, publishing both the technical guidance for the Subsidy control aspects of the TCA and being charged with the launch of the transparency database for Subsidy measures envisaged by it. BEIS is not independent enough of government to fulfil the criteria for the 'independent body' contemplated by the TCA, but it is not inconceivable that it may be the future home for an independent unit or organisation in future.

Impact on EU companies

In terms of the grant of EU State aid, there is no change for EU companies. Indeed, the TCA gives something of an indication of the likely movement of EU State aid in future, for example the prospect of an increased de minimis threshold. What will affect EU companies in the longer term will be their ability to complain about UK Subsidy grants to their competitors which, subject to the considerations above, will be limited to a UK-based judicial review at least for the foreseeable.

Next steps

The onus is now on the UK to design and introduce its own national subsidy regime. Key aspects of that deal to look for will be the administering body, any changes to rights of appeal and complaints, block exemptions or equivalents, and any guidance on how the conditions applicable to particular sectors should be assessed.